Analyst forecasts Chinese economic growth will slow to 3 or 4 per cent

A China expert says expectations of continued 7 per cent or more economic growth are too optimistic.

Michael Pettis, professor of international finance at Peking University, believes growth rates might fall to as low as 3 or 4 per cent, which he says means the reform process is working.

However the forecast will strike fear into the board rooms of Australia's resource companies which have enjoyed years of booming exports to feed China's rapid industrialisation.

Australia's mining companies and its national accounts have done very well out of China's rapid growth, and that is continuing even though its has slowed to around 7.5 per cent from the 10 to 12 per cent of the past two to three decades.

Forecasters say iron ore sales alone for this year will earn Australia between $80 to 100 billion.

However, Professor Pettis says if China's growth rate falls to 3 or 4 per cent then it is a different story.

"China consumes something like 60 per cent of total global iron ore," he explained.

"So an adjustment in China almost certainly will mean a significant reduction in the price of hard commodities, which affects countries like Australia, Peru, Brazil, etc."

Almost by definition, the reforms must result in much slower, although much healthier, growth.

Professor Michael Pettis, Peking University

There is nothing magical about a 7 per cent growth rate - it is simply what China's leaders want.

It is also what many analysts believe is the rate at which the economy can more sustainably expand and still provide jobs.

Under new medium-term plans, policies are now focussed on that goal.

The shift is to encourage more domestic consumption and control the excessive reliance on real estate speculation and massive infrastructure building, and their resultant massive debts, which have grown at 2 or 3 times the rate of the economy.

"Slowing down debt creation will slow down growth pretty significantly. In fact interest rates have to go up, the currency has to continue to rise and wages have to rise more quickly than productivity for a few years," Professor Pettis argued.

"This will rebalance the economy, but in the same way that it (China's economic model) goosed GDP growth for the last 20 to 30 years, reversing it will have a negative impact. So, almost by definition, the reforms must result in much slower, although much healthier, growth."

Painful adjustments

Rebalancing means addressing the large gaps that have opened between the extremely rich political and economic elites and the majority of less well off.

Professor Pettis says if financial reform is implemented growth must fall but, in his view, lower growth will benefit ordinary households because they will gain a bigger share of national income.

However, he warns that Beijing's efforts at reform might not succeed.

The best case scenario suggests the upper limit of growth ... is probably not going to exceed 3 or 4 per cent.

Professor Michael Pettis, Peking University

"We are likely to see substantial political opposition to the reforms. Not only have we already seen that in China, the last two or three years have been pretty exciting in terms of politics at the elite level, but also this is what we've seen in every other country that's gone through this adjustment process," he added.

"Well in my opinion the best case scenario suggests the upper limit of growth on average during the ten year expected Presidency of Xi Jinping is probably not going to exceed 3 or 4 per cent," he said.

"The beginnings of the adjustment have lopped about 3 percentage points off growth, and we've only just begun the adjustment process. Now if growth rates don't drop I would consider that to be an indication that Beijing has had real trouble implementing the reforms."

However, Professor Pettis still believes that China's leadership will avoid disaster.

"It depends on whether it happens in an orderly way, which I'm still betting it will happen, or in a disorderly way," he said.

"As far as the rest of the world goes, what we would want to see is an adjusting China in which Chinese imports grow more quickly than Chinese exports. Now not positive for everybody unfortunately."

Perhaps especially not for Australia in the short term as a resource exporter.